Should You Invest in Self-Storage Facilities or Rental Properties?
If you’ve been thinking about diversifying your portfolio with alternative investments, residential rental properties could be top of mind. But they’re not for everyone. In fact, residential property investments may offer more headaches and hands-on involvement than their commercial counterparts — such as self-storage.
Here are a few pros and cons to consider if you’re still deciding between investing in residential rental properties or self-storage facilities.
Residential vs. Commercial Investments
As we think about the difference between investing in a residential rental property or a self-storage facility, it’s helpful to start by acknowledging that these investment types fall into two different categories altogether.
Owning a rental property that’s either a single-family home or multi-family home with up to four units is considered a residential real estate investment. You’re marketing directly to individuals and families to come live in your unit, and the property size tends to be smaller than that of a commercial investment.
Self-storage facilities fall under the commercial investment category, which can also include office buildings, larger multi-family buildings, warehouses, hotels, etc. Commercial real estate tends to market toward businesses or corporations; though in the case of self-storage, you’re often marketing to residential customers as well.
Benefits of Residential Rental Properties
There’s lots of flexibility in how you own and manage a rental property, which can reap some notable benefits for savvy investors.
For example, you could purchase a two-unit condominium with the intention to live in one unit and rent out the other. Or, you might purchase a vacation home to rent out during peak tourist season. House “flipping” is a common (albeit risky) endeavor that’s grown popular in recent years. This, of course, involves a good amount of hard work and includes its fair share of “unknowns.” But, when done successfully, it can certainly yield a tidy profit.
Tax Benefits
The tax advantages of owning a rental property are especially appealing for many investors. The IRS allows landlords to deduct a number of expenses associated with owning, managing, and operating a rental property. These deductions include:[1]
Depreciation on the property
Mortgage interest
Home improvements
Necessary expenses
The costs of hiring a property manager/management company
Insurance
Longer Leases
It’s not uncommon for tenants to sign six-month, one-year, or even two-year leases. For investors, this translates to steady income with less turnover. As a result, they can spend less time marketing the property, vetting potential tenants, and cleaning or fixing the property up between renters.
Challenges with Residential Rental Properties
Investing in residential rental properties isn’t without its challenges.
Turnover
While there may be less turnover due to longer leases, the turnover process itself can take quite some time — and cut into your ability to rent to new tenants sooner. Depending on the state of the property, it could require new appliances, fresh paint, drywalling repairs, deep cleaning, etc. This could take days, weeks, or in extreme cases, months. Since you don’t have the ability to walk into the property whenever you want, it can be hard to know what the state of the unit will be until the tenant has vacated.
Eviction
Speaking of tough tenants, the eviction protocol varies from state to state, but it tends to be a long, drawn-out process no matter where your property is located. If you’re trying to get rid of a tenant who's causing damage or neglecting to pay rent, expect the eviction process to take months and cost you legal fees. Not to mention, something like an eviction moratorium (as we saw in 2020) is completely out of your control and can keep bad tenants living in your units for even longer.
Maintenance Costs
Think about how much goes into maintaining your current residence. Lawn care, HVAC, pest control, utilities, property taxes — the costs associated with owning a home can feel never-ending.
While you’ll have the ability to deduct some of these expenses or put the responsibility on your tenant to pay, you’re still going to have higher operating costs with a residential home than a commercial property like self-storage.
Property Value
We expect our home values to rise, but there’s really no guarantee that’ll be the case. You can’t control what happens in the neighborhood surrounding your property. Over the coming years, it could experience a resurgence, or it could decline dramatically. It doesn’t matter how much research you do beforehand, a part of your home’s future value is left up to chance.
Benefits of Self-Storage Facilities
In comparison, self-storage facilities offer many benefits for investors.
Faster Eviction Process
Unlike residential rental properties, self-storage rentals are not subject to eviction moratoriums. The eviction process is much faster, and cheaper, in the event of a contract breach or failure to pay. Plus, unlike a single-family home, one troublesome tenant doesn’t affect your entire investment’s ability to produce income. Even if one unit is out of commission, you still have plenty of others being used by responsible renters.
Short Lease Agreements
People typically rent out storage units on a monthly basis. Having shorter lease agreements makes it easier for property owners to adjust rental rates based on market value and consumer demand.
Lower Operating Costs
You’re not responsible for someone’s living space, which means self-storage facilities provide a much lower operating cost than residential properties. There’s little to no plumbing, trash, yard waste, appliances, or other common costs you’re expected to cover when renting a residential home.
Quick Turnover
Storage units are simple in construction, which means there’s very little involved in turning them over between tenants. It could take a couple of hours, maybe a day, to clean out a unit and prepare it for use by a new renter.
Recession Resistant
Historically, a recession does not appear to negatively impact demand for self-storage space. In fact, there are a few reasons why the self-storage space can actually have a positive outlook in the face of an economic downturn.
During a recession or downturn, people tend to downsize or consolidate. This often requires additional storage in order to account for smaller living spaces. In addition, there are many reasons why people need to use self-storage — reasons that have nothing to do with the economic cycle. These could include homebuying, loss of a family member, moving, bringing a kid home from college, etc.
Challenges with Self-Storage Facilities
While there are many benefits to investing in self-storage facilities, it’s still important to consider this investment type carefully before diving in.
High Turnover
With shorter leases comes higher turnover, it’s simply inevitable. This can create a challenge for facility owners, as they need to put more effort into marketing the facility in order to continually bring new customers in.
Demand
Anticipating the demand for units isn’t an exact science, and there are some factors outside of your control that can impact whether or not the area will support a new facility.
For example, developers could advertise that they’re building 500 new homes in the area. Then, an investor backs out or there’s an issue with the permits. Now that land is sitting stagnant, and no new communities are being constructed. If you had anticipated higher demand from these planned homes, you’re left out of luck.
Which Investment Is Right for You?
There are plenty of considerations to make regarding what type of alternative investment would be best for you and your family. At Belrose Storage Group, we connect private investors with self-storage facilities to offer security, reliable passive income, and ongoing opportunities for growth.
Feel free to contact our team to learn more about investing in self-storage with us.
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